3Com challenged Cisco with a Boundary Router strategy that threatened Cisco’s core router franchise.
SM: So what prevented you from finally catching Cisco and passing them? EB: In 1997, there was one major shock for 3Com. More and more enterprise networks had to extend into carrier networks. Enterprises could not build all of these large intranets themselves; they could not manage the WAN. They had to use the carrier networks to switch their packets. You could not build enterprise networks successfully and sell to the enterprise unless you could sell through carriers and into carriers.
There was one big trend which was happening; the growing presence of carriers in data networks. Until then, they were only switching voice, but now they were switching data and selling data network extensions.
Then there was Mosaic, Netscape, and the Internet – networking started touching the masses. It became a mass market, a consumer market.
I became convinced the kind of network we built had to be deployed in small businesses and homes. Everywhere, with an enterprise base, we were pulled towards carriers on one side and consumers on the other. At the end of 1996, it was probably the peak of the company in terms of its flawless execution, we had a choice to make.
We almost bought a carrier company on the east coast, but at the last minute a couple of my executives and board members felt that company was too expensive, they were trading at huge multiples, and even though it made sense strategically, we could not justify the price they commanded. We decided to pass on the buyout even though we were pretty far along, and we decided to go with a second choice, which was US Robotics.
SM: What was the appeal with USR? EB: They had the advantage of helping us address two things at once. They had a consumer play, selling through retail channels to consumers, and they had this business called Palm. They also had a carrier play. In those days, the only way you could access America Online was through dial up, and the only dial up line switches were US Robotics, both on the consumer side and on the infrastructure side. This was attractive, and it was more palatable pricewise to the board because we addressed two concerns at the same time.
It was a $6.5 Billion transaction, and 3Com was at $35 Billion. This happened in January 1997 and we closed in May of 1997. Ultimately it became a huge management challenge inside the company because complexity more than doubled. We had a massive influx of new channels to deal with, new business models. Retail channels, carrier channels, and we now had the internet as a channel, we more than doubled the number of products offered, and we had branding considerations – consumer and carrier, and then we had to deal with locations. US Robotics was based in Chicago and had locations all over the world, just not where we had locations.
It became complicated, and US Robotics was at an inflection point where modems, which comprised a large part of their business, had steadily increased in speed. They were about to go to the next increment in speed which was 56K. Up to that point in time, they had been able to ride that incremental increase beautifully. For 56K the industry fractured.
It happened just when we were closing the transaction. The industry failed to come to an agreement on a common standard for 56K. You had a standard called X2 for US Robotics, and another standard pushed by Rockwell and others. Consumers did not want to buy the wrong thing so they decided to sit back and wait for the dust to settle before they would upgrade to the next modem.
This was also true of the infrastructure players, since AOL would not upgrade unless the consumers were asking for it. Then, people started talking about broadband – why upgrade if you can go to DSL or cable? It created a big implosion on that part of the business. During the second half of 1997, and 1998, the company really lost ground because USR started to shrink.